Thread by @myfinology

How many stocks should you have in your portfolio? 🤔

Here's a 🧵 on Ideal Portfolio Mix ⤵️

#StockMarket #Investment

An investor majorly faces two types of risk: market risk and company specific risk.

Market risk is certainly inevitable but non-market risk i.e. the uncertainty of a specific area of the market or specific stock can be managed through proper diversification.

#nifty50 #NASDAQ

Diversification basically means spreading your investments in various categories of assets, which helps earn the desired returns without exposing your portfolio to high risk.

How much diversification is enough?

#inflation

According to Joel Greenblatt, owning 2 stocks eliminates 46% of the non-market risk of owning just one stock, while

- 4 stocks reduce this risk by 72%.

- 8 stocks by 81%.

- 16 stocks by 93%.

- 500 stocks by 99%.

Well it's clear that less number of stocks means higher volatility and more risk but at the same you cannot completely eliminate the risk even with 500 stocks!

Moreover, with higher number of stocks, the risk factor decreases however the profit will also decrease.

This is because only one good performing stock will have minimal impact on the portfolio.

#DowJones

The solution is simple. An adequately diversified portfolio containing 15-20 stocks!

Because your risk anyway gets eliminated by more than 90% with this allocation.

◉ Don’t invest more than 10% in one stock

You can’t call it diversification if you have invested 30% in one stock. So, it’s advisable not to invest more than 10% of the total portfolio in one company.

Generally, 4-8% exposure to a single stock is considered apt.

◉ Don’t invest more than 25% in one sector

Diversification should not be restricted to a particular industry.

One unfavorable event may eat away all the returns if you have focused too much on a sector.

You should add an ideal number of 5-6 sectors in your portfolio with not more than 25% investment in a specific sector.

- Investing in other instruments

An ideal investment portfolio isn't made entirely from equity.

You should invest in other asset classes as well like
- Gold
- Bond
- Real estate

A more prudent way is to plan a portfolio considering your investment goals and risk appetites.

Wish to know the right allocation for your portfolio?

Visit Recipe.finology.in/financial-plan…